UK CRE trends seeing off Brexit concerns

By Paul Norman - Thursday, October 05, 2017 10:00

While the CRE boom seen since the end of the financial crash is bound to come to an end eventually it will likely be with a soft landing, not another crash, reports Situs in its wide-ranging biannual report surveying Europe’s commercial real estate lending and investment markets.

Situs RERC's survey finds that despite uncertainties following the Brexit vote, the economic and CRE news remains encouraging throughout Europe with all markets reporting that plenty of cash is still available for investment.

Those surveyed attribute this at least in part to the ECB’s decision to keep interest rates low and continue quantitative easing (QE).

Taco Brink, Managing Director of Situs RERC, said: “In the UK, the economy and CRE are benefiting from loose economic policies, a weak pound sterling and an influx of foreign investors looking for places to park their money for the long term. These trends are overriding understandable concerns about the short- and long-term effects of Brexit.

“Germany has a stable political situation, a strong economy, low unemployment, low interest rates and no inflation,” says Wilhelm Hammel, Managing Director of Situs. “This has led to Germany overtaking the UK as the preferred European CRE investment location.”

UK problems

Focusing on the UK the report finds that the country most negatively affected by Brexit over the next year will likelyl be the UK, even before it takes effect.

It writes: "In particular, Brexit is likely to have the most negative impact on debt availability and equity flows in the UK, but the effect will not be severe on valuation levels. On the other hand, experts reported that Brexit is likely to have a positive impact on CRE in the other EU countries; transaction volume and risk appetite are predicted to benefit the most.

"Even if there had never been a Brexit vote, the EU has been showing signs of being a less unified market. Germany, for example, has a strong economy that is experiencing a large influx of capital. CRE there continues to be an attractive investment, and the added migration of some companies – particularly banks – from London to Frankfurt will help Germany at the UK’s expense."

Respondents in all of the major countries/regions indicated that the events since the Brexit vote have lessened their appetite for risk in the UK because of increased uncertainty. Investors in Benelux indicated that the UK’s handling of Brexit decreased their appetite for risk in the UK by approximately double that of the other European countries/regions.

In terms of fund allocations UK investors were the most optimistic about the UK market; this was the only European region that did not expect to reduce allocations to the UK over the next six months.

Debt matters

For Europe overall, the amount of available debt capital has risen over the past year, while the availability of equity capital has remained steady during the same period.

For Europe overall, the amount of available debt capital has risen over
the past year, while the availability of equity capital has remained
steady during the same period (see Exhibit 2). Respondents noted
that equity capital is still more readily available to investors than
debt capital. The discipline (underwriting standards) of both debt
and equity capital has loosened over the past year; however, the
underwriting standards of debt capital has remained stricter than
underwriting standards of equity capital. Over the past three years,
the availability of debt and equity capital rating has been higher than
the rating for discipline of debt and equity capital – except for third
quarter 2016, right after the UK voted to leave the EU.
Among the regions2:
• Equity capital availability was higher than debt capital
availability for all regions except Benelux, where they were
roughly equal (see Exhibit 3).For Europe overall, the amount of available debt capital has risen over the past year the report finds, while the availability of equity capital has remained steady during the same period.

Respondents noted that equity capital is still more readily available to investors than debt capital. The discipline (underwriting standards) of both debt and equity capital has loosened over the past year; however, theunderwriting standards of debt capital has remained stricter thanunderwriting standards of equity capital.

Over the past three years, the availability of debt and equity capital rating has been higher than the rating for discipline of debt and equity capital – except for third quarter 2016, right after the UK voted to leave the EU.

Among the region equity capital availability was higher than debt capital availability for all regions except Benelux, where they were roughly equal.

Germany had the greatest availability of debt capital among all the regions, despite relatively strict underwriting standards.

The underwriting standards for equity capital were stricter than for debt capital in every region, but the margin was significantly wider in Benelux.

Lending conditions

The increase in LTV ratios for Europe overall suggests that investors are feeling more certain about the lending environment across Europe, Situs reports.

Among the regions:

• The majority of respondents in every European region believed that underwriting assumptions were better today compared to pre-crisis levels, except in Benelux, where 50% believed underwriting assumptions were better today.

• Benelux was the only region to have a significant percentage of respondents who felt underwriting assumptions today were worse than pre-crisis levels.

• Respondents in the Mediterranean countries were the most likely among the European region's respondents to say that underwriting assumptions were very disciplined.

Other highlights from the report include:

• Ireland and Spain have had great economic growth in recent years, even though the unemployment rate in Spain remains above 17%. Ireland stands to be more affected by Brexit because so much of its economy is linked to the UK. But not all in a negative way, and Spain’s CRE has seen a recent surge of investors pouring money into Madrid and Barcelona, along with smaller cities such as Malaga and Valencia.

• The Netherlands is the logistics hub for Europe and highly dependent on foreign investment. It is doing well now, and should continue to as long as Europe as a whole keeps riding the wave.

• The risk tolerance for alternatives, industrial and multifamily product in the UK remains high despite the Bank of England reaffirming that the UK commercial property market is vulnerable to a repricing.

• While many pundits claim the market has peaked, or will peak soon, the majority of respondents in the Situs RERC survey believe that underwriting assumptions in Europe are better today than before the GFC.

• Underwriting standards of debt capital have remained stricter than underwriting standards of equity capital.

• The recommendation to sell across Europe remained by far the most popular investment option during Q3 2017, significantly more than a year ago. Only in Mediterranean countries did investors favour buying over holding or selling properties.

• LTV ratios in Q3 2017 in the UK and Germany specifically, increased over the previous quarter.

• German yields are at unprecedentedly low levels – even in the hotel, student housing and nursing home space.

The Situs RERC Real Estate Report – European Edition analyses the major asset classes and European regions. Situs RERC surveyed experts throughout Europe and culled data from hundreds of CRE valuations to provide data on investment rates and investor sentiment.

pnorman@costar.co.uk

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